As an offshore manufacturer of internationally-marketed goods, you are not alone if you are concerned about risks associated with Chinese suppliers and China’s supply chain sector. The 2011 earthquake and tsunami that hit Japan revealed how devastating a natural catastrophe can be. If a similar event occurred off the shore of China, the entire globe might be adversely affected by delayed, disrupted or destroyed manufacturing supply chains.
Other circumstances when manufacturing in China also raise concerns about China’s ability to properly and ethically follow through on the billions of dollars of manufacturing contracts operating in today’s market. According to FM Global, “The region has not yet fully embraced many of the risk-management practices of its western counterparts.”
The Japanese disaster triggered a survey of 100 financial executives at large, multinational corporations regarding their activities in, and expectations of, the Chinese manufacturing centers. The findings were remarkable:
– 86% of the companies use Chinese suppliers, versus 43% who use Japanese suppliers;
– 83% also reported supply chain disruption to be anywhere from a “moderate” risk to “the greatest risk” of accessing the sector;
– 94% are concerned about natural-disaster related disruptions;
– 61% are considering implementing a more robust risk assessment process for selection of and doing business with Chinese factories.
Says Ken Davey, senior VP of FM Global:
“A secure and resilient supply chain creates a competitive advantage. Delivering products and services when others can’t results in satisfied customers and opportunities to secure new ones. A fragile supply chain is clearly a competitive disadvantage if a disruption occurs.”
With five years working and living as an independent offshore supply chain consultant in China (during my 14+ years working and living across Asia), I have been on the front line of evaluating supply chain risks and compliance for international manufacturers. Natural disasters aside, common concerns for every offshore manufacturer start with finding a qualified factory in China, and from there include:
– completing sufficient and reliable Chinese factory verification;
– mitigating liability and other risk factors in Chinese factories, and
– ensuring that chosen Chinese companies adhere to accepted and expected Codes of Conduct and production standards.
To reduce or eliminate challenges posed to your company by these concerns, I concur with the conclusions identified by FM Global, and recommend that every offshore company develop a culturally realistic, operationally feasible, viable and effective risk mitigation strategy for these situations that occur on a regular basis across the Chinese manufacturing sector:
– addressing cultural disparities in accepted business practices;
– assuring credibility of China factory certification documents;
– ensuring credible Chinese factory verification of ISO standards;
– looking for and identifying factory fraud;
– ensuring product compliance for domestic and foreign markets, according to international standards;
– reducing the opportunity for erosion of quality (quality fade);
– ensuring Occupational Health and Safety standards are met;
– ensuring Chinese standards for Corporate Social Responsibility are followed; and
– ensuring social and environmental compliance with Chinese production standards and auditing processes.
Every business risks substantial financial loss if or when:
-it encounters factory fraud;
-if its products are manufactured to a reduced quality, or
– if a relationship with a supplier suddenly deteriorates.
In addition, in a situation of product non-compliance or quality fade, customer health or safety is put at risk, along with customer satisfaction, brand image and corporate reputation. Remediating these losses can take years, and in the case of a man-made or natural catastrophe, the business may not survive. Avoiding risks and losses altogether offers the best path to maximizing the opportunities provided by China’s manufacturing sector.
Manufacturing overseas offers enormous benefits. Unfortunately, circumstances seen in China’s current manufacturing market also offer enormous risks of loss if or when things go wrong. Talking to a qualified, China supply chain consultant can mitigate those risks in your offshore supply chain, and increase the likelihood of achieving highly successful manufacturing results.
To better understand how you can validate your suppliers you can download a free checklist “New Supplier OnBoarding Checklist” here.
These checkpoints are not only for new suppliers, in fact they should be checked and verified regularly for all suppliers.
This blog was written by Carsten Primdal, an independent consultant who helps businesses that have manufacturing done overseas – especially in China – minimise supply chain risk.Drawing on years of on-the-ground experience and a strong understanding of the cultural and commercial context, Carsten is passionate about helping his clients gain greater control over the risks most companies face knowingly or unknowingly.
Urgent issues? Questions? Concerns? If you are considering/already buying from Chinese factories and would like more information, please feel free to contact us for an obligation free talk.
I can be reached at email@example.com or on (+61) 413 089 020
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